Can We Trust Electricity Prices?

Market monitoring provides continuous surveillance and evaluation, like a protective screen or filter, crucial for well-informed decision making, cost efficiency, and ensuring stakeholder confidence in markets and resulting prices. In this policy brief, RAP identifies best practices that could be useful for the EU.

By
Sarah Keay-Bright
On
July 5, 2016

One of the essential components of competitive wholesale electricity markets is market monitoring—the process by which producers and consumers can be assured that power markets are functioning effectively and that power market prices have been set due to costs, values, and system conditions, as opposed to through the exercise of market power, strategic withholding, or manipulation. Market monitoring encompasses both market surveillance to root out any wrongdoing and market performance assessment to continuously evaluate the performance of the markets, in particular, the effectiveness of market design and market structure and the impact of policies or interventions on market functioning.

This policy brief explains how effective market monitoring is crucial to stakeholder confidence in wholesale electricity markets. Effective market monitoring is a sure way to help ensure consumers actually receive the benefits that well-functioning competitive markets are supposed to deliver. The briefing also sets out why Europe’s current wholesale power market monitoring arrangements need review and reform that ideally would be part of the EU’s current market design initiative, and suggests key questions that should be part of this review process.

The brief also includes recommendations drawn from the experience of several U.S. regions, Australia, and Canada. The first being to significantly increase resources for monitoring the EU’s power markets as economising on surveillance and enforcement is a false economy. Best practice in other markets around the world illustrate that the quality of data, data analysis, and communications for market performance assessment could be improved. Market surveillance could also be improved to ensure anomalies are quickly followed up with effective and timely investigations and enforcement. The EU’s monitoring system would also benefit from a greater degree of independence, integration of the market surveillance and market performance assessment functions, and a regional approach.

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